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How to invest in gold?

Jul 6, 2012

In our previous article, we discussed the pros and cons of investing in gold. The burning question that we left our readers with was how to actually invest in gold? What are the merits and demerits of each way? And this is exactly what we intend to discuss in this article.

There are several ways in which one can invest in gold. Starting from popular forms like jewellery to intangible forms like gold funds and ETFs. The options are plenty. Broadly speaking, investing in gold can be classified in two ways: Investing in physical gold or investing in non-physical gold.

Investing in physical gold

This can be done in either/ all of these ways- buying gold jewellery or by buying coins or bars.

  1. Jewellery - The easiest and most popular, (at least with the women) way of buying gold is to buy gold jewellery . But this is not really an investment in the strict sense. There are several reasons behind this. The first is that jewellery has something called making charges which can start from as low as Rs 100 and are decided by the whim and brand of the jeweler. This increases the cost of investment and most of the times the cost of the jewellery does not reflect the true value of the gold.

    The second problem with owning jewellery to invest in gold is the storage and safekeeping cost. In India a popular place for storing gold jewellery is the bank lockers which come with their own annual rentals and maintenance charges. These too add to the cost of holding the investment thereby increasing your costs. The final problem with buying jewellery is the selling part. No investment is complete unless you are able to sell it at fair value. Besides the sentimental reasons, it is still not very easy to sell gold jewellery. Most jewelers deduct a value when they repurchase jewellery. Moreover most such transactions are done against new jewellery or gold items and not for cash. As a result, realizing the value of investment if made through jewellery is difficult and at times unprofitable.

  2. Coins - The other way to buy gold in its physical form is through gold coins. Gold coins are an easy way of picking up gold. The good thing about investing in gold coins is that the price is close to the spot price of gold. The premium charged on gold coins is minimal. Another advantage is that since it is available in a variety of weights and sizes, even someone with a lower budget can invest in coins For example, coins as low as 1gram weight are available. So even when gold is trading at lets say Rs 29,000 per 10 gm, one need just Rs 2,900 to kick start their investment portfolio with gold. Gold coins are available with jewelers as well as with banks. So it is relatively easy to buy and sell them.

    However, the issue of storage and insurance still remains with coins. These add to the cost of holding the coins as an investment. Also, at times the coin maybe available at a high premium when there is a surge in the demand for the same.

  3. Bars - Bars of gold come in standard sizes and purity levels. Like coins they too trade at levels close to the spot price of gold. Unlike coins the premium on this is even lower and does not tend to fluctuate much. As a result they make an ideal way of investing in physical gold.

    Besides storage and insurance the bigger problem with holding gold bars is that they come in standard sizes. Hence they may not be very suitable for small ticket investments. Moreover it is difficult to book partial profits. Obviously one cannot cut the bar into quarter or half to realize partial gains.

Overall, investing in physical gold works well for investors who prefer to hold on to something tangible. Purity of the metal, storage, insurance and correlation to spot prices are the important factors that one needs to consider when going for physical gold. At the same time, it is also important to keep the liquidity angle in mind. Naturally liquidity is not as high electronic versions as one needs to make the effort of going to the shop to buy or sell it, etc. Nevertheless it is still an easy way of investing in gold.

In our next article we will discuss the ways of investing gold in the non-physical format.


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